What would you do in my situation?

Question

Hi-

Over the course of the last couple of years I have pieced together the beginnings of a financial education. The birth of my daughter made me realize that I don't want her to begin her "working" life with student loan debt like my wife and I have. This began my research of ways to invest our money to grow into a college fund for our daughter and eventually some retirement money for my wife and I. After researching a couple different investment and asset building options over the course of the last 3 years, I think that real estate makes to most sense for us. I have been reading a lot on BP, listening to the podcast and reading real estate investment books. I have come up with many different options for getting to our goals, but thought I would reach out to the forums to see what people with experience would do in our situation and possibly come up with some options I hadn't considered.

Our goal is to build assets to eventually send our daughter to college, if that is the path she chooses. She is currently 3, so we have about 15 years. I am a teacher and my wife is a nurse practitioner. We are 34 years old and have a combined salary of about $170,000. I could see myself taking an early retirement option in 20-25 years. We do have small, but building 401ks. I am supposed to get a pension from the state, but nobody can count on that at this point.

We currently live in a SFH that we paid $315,000 for with an FHA loan (3.5% down). Comps in the area are selling for around $350,000. The principal on our currently loan is about $275,000. I am currently in the process of trying to make sure the house will appraise for enough to refinance out of the FHA loan. We have about $30,000 in student loans and $30,000 in credit card debt.

We are seriously considering moving to be closer to our families. This would save us on our current daycare costs, but also allow us to pull the equity we have put into our house out. SFH in this area are about 15% cheaper than where we currently live.

One option that we have when we move is to move into my mother in laws 3 flat and live rent free if we update the 3 bedroom (with full basement) unit. It just needs cosmetic updates (new carpet/flooring, bathrooms, wall paper removal etc.). If I had to guess I would say this would roughly cost $10,000. This is in a good school district that we would be happy to eventually send our daughter to (2 more years). This would leave us with the remainder of the profit from the sale of our current house to buy a rental property. This would not be a long term solution though; eventually we'd like to be back in a SFH.

So now, I put it to all of the creative, experienced people that contribute to this forum...What would you do in our situation? What would be your 1 year, 5 year, 10 year plan?

I can't wait to hear what you guys come up with. Let me know if you need more information.

Thanks for taking the time to read and contribute!

Kevin Siedlecki · Answer

@Jim Thorton - Not counting on my teacher's pension is why I am in real estate, too. Here's what I would do:

Year 1: Sell your house and move into the rent-free unit. Use the proceeds from the sale to do those improvements, and buy one income-producing investment property.

Year 2: Saving money from your jobs and your rental, look into another FHA on a single-family or multi-family property. Your kid does;t need to be in school yet, so this could be in a neighborhood outside of your eventual long-term area.

Year 3: Rent out the house you bought in year 2, and get another owner-occupied loan on an SFR that will become your home.

Year 5: Having saved money from your 2 rentals and your jobs, buy another performing asset, maybe a multi-family property in a neighborhood not quite as nice as yours, but decent (C+/B-) that will cash flow nicely for you.

Repeat once a year or every other year in years 6-10, and, if you've bought well, you should have a portfolio of 5-8 properties, which should kick off enough cash flow to cover your daughter's college education, which continuing to build wealth for your retirement.

Another option. This is not what I would do, but if getting her to college is your only goal, it might be safer.

Year 1: Sell your house and move into the rent-free unit. Save money.

Year 2 or 3: Using the money you've saved, but an income-generating multifamily property worth between $400,000-500,000 with a 15-year loan. Use any cashflow to pay down the loan early. Save money from your W2 income for a downpayment on another residence for yourself.

Year 4 or 5: Buy a residence for yourself. Continue to use extra cash to pay down the loan on your investment property.

Years 6-14: Use all the cash flow from the investment property to pay down the loan.

Year 15: Sell or cash-out refi your investment property, so you have $400k to send your daughter to college.

You could also do something in between the two options I've presented. Buy just the one more expensive property, contribute the cash flow in a tax-protected fund for her college education, and then cash-out refi in 15 years for whatever else you'll need to cover her college costs.

Jim Thorton · Answer

I've been running the numbers in a couple of different scenarios. I think it makes the most sense to use the equity from selling our current house to pay off credit cards and the rest to by a rental. I think we could do both within the year. Our next move would have to be to get out of my mother-in-laws apartment. We would have significant savings after year 1, but would like to use some of that on another rental in year 3 or 4. Could I get a FHA loan (3.5% down) even if I already hold a convential loan on a rental?

Jim Thorton · Answer

Thanks for all of the ideas and contributions you guys have made.

Right now I'm trying to organize the numbers of all the different options. I think I have already eliminated renting our current house. The numbers don't make sense. This also means I don't need to refi.

I'm sure I'll come back with more questions as I flesh things out. I'll reach out to @zach karp as well as we get this process rolling.

Again thank your for sharing your ideas.

Zack Karp · Answer

@Jim Thorton

Hi Jim, welcome to BP and sounds like you have a lot of options, which is a good thing.  Just remember the most important part.  Happy wife, happy life.  I can't tell you what you should do, but if you need any help with weighing your options, I am a local mortgage pro (for 18 years) and a real estate investor, and I pride myself in strategy for the future and seeing 2,3,4 moves ahead.  I can explain all the angles so that you can make the best educated choices for you and your family.  Let me know if you want to connect.  Best of luck!

Sarah Ottesen · Answer

Hello @Jim Thorton!

My Years line up closer to @Kevin Siedlecki's first proposal.  The main difference is taking care of your $60,000 worth of debt.

Year 1: sell SFH and stay in the unit your mother-in-law has. Use the profit from the sale to pay off the credit card debt and use the $10,000 to improve the unit you will be staying in.  This may leave you about $15,000-$20,000.  Put this in a money market fund until you have enough for a down payment on a rental unit.  If the rental is less than a 5-plex, you should be able to get a loan with 20% down, you may need to shop around to find it.  Try local/regional banks.  Every month put the money that you would be spending on principal and interest if you would be staying in your current SFH house.  I am estimating about $1500.00 a month.  Also, what percentage of your income are you putting in your 401k?  If it is less than 15%, consider also putting the additional amount (to reach the 15%) in the money market fund.

Year 2: By the beginning of year two you should have about $30,000-$40,000 saved.  It really depends on the amount of profit you will have from the sale and when the sale happens.  You should be able to really start shopping around for a rental. Close on a house by the end of the year Continue to save your mortgage payment and your additional amount from your paycheck.

Year 3: With the money you are saving from Year 2, you should have at least $20,000 by the beginning of year 2.  Depending on the cash flow of Rental #1 (bought in Year 2), you may be ready to purchase Rental #3 by July.  Continue to save your mortgage payment and your additional amount from your paycheck.

Year 4: Rinse and repeat!  Hopefully with the cash flow, you will be able to buy a place with at least 20% or 25% equity every 6-9 months.  If you want to move faster, just save more from your W2 income.

This was a fun exercise for me, but you have to do what is best for you since this is no exercise for you, it is real life!  Good luck!

Trevor Kolb · Answer

@Jim Thorton Sounds like you've built a solid foundation for investing, but my vision in your situation seems a little bit different then those expressed already. Since you've already envisioned moving closer to family and in with your in-laws, my focus would be to complete that transition once you've finished your refi on the current property.

Once you've determined when you and your family will move, begin focusing on renting out the current house and establishing the property management team that can handle the home for you. Already, this gets you into the investing game with the current property, while pulling the equity out for another investment. Now, if you will be obtaining the in-law's property as an inheritance, before you begin investing your money into her property, ensure the paperwork for that is in place and has been reviewed by an attorney. Last thing you want to deal with is disputing property rights after investing money into it, should the worse happen. A "CYA" - cover your assets, if you will.

Personally, I'd take the equity from the refi and attempt to locate a nice multi-unit (4) to utilize for house-hacking, that meets your location needs. This would already set you up for 2 income generating properties before the end of 2017, of which will allow you to continue the BRRR strategy.

Thomas S. · Answer

With a combined income of $170K you should have no money issues what so ever and investing will only be for the enjoyment of creating additional wealth. If you are not able to save all the money you desire on your present income then you are either not managing it properly or living a somewhat wasteful lifestyle.

Although I believe your present income should be more than you will need you should be teaching your daughter to save for her own education as opposed to simply paying her way. If you teach her that money is free she will not learn the value of money on her own. What I did was loan my children the extra money they needed at a reasonable interest rate. They however earned most of their education money on their own.

All this to say do what ever you find most interesting as a investment and enjoy the fact that your income is more than sufficient to do what ever you please. I do not see your issue with the 20% in year three.

Matt Lefebvre · Answer

In regards to your first question @Jim Thorton, as a homeowner, upon the sale of your personal residence that you have lived in for at least 2 of the last 5 years, you are exempt capital gains tax up to $250,000 as an individual and up to $500,000 as a married couple.  This is an exemption on the profit, not on the total value of your home.  So if you have to pay off a $250,000 mortgage and the sales price is $300,000, the capital gains tax (and thus the exemption) would only qualify on the profit... so you don't have too much to worry about there!

Jim Thorton · Answer

Thanks Kevin. That is kind of what I was thinking in terms of a plan. A couple of questions come up when I think through the specifics of this.

1. If we use some of the profit from the sale of our current house to fix up my mother in laws apartment, do we need to pay taxes on that?

2. From what I've read, we should plan on putting down 25% for an investment property, is that correct?

3. It should be easy to save enough money for a FHA downpayment. I would look for a 3plex for this to offset some of our mortgage and eventually lead to more cash flow. Where I get stuck is how to come up with the 20% for a down payment in year 3. We would be able to save some and have some savings left over from year one but I think 20% might be a stretch. I guess we could refinance the FHA loan and pull cash out, but would need to make sure we are under 80% LTV after a year.

The wheels are turning.

What would you do in my situation?

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